How Knowing your Numbers can Boost your Farm’s Success

Key Takeaways:
  • Understanding both direct and overhead costs is important for knowing your farm’s true profitability.
  • Tracking cash flow and break-even points empowers farmers to make smarter financial decisions and plan effectively.
  • Using specialized farm management tools like AgriBuilder can help you forecast cash flows and stay profitable year-round.

 

Farming is more than just planting and harvesting crops. It’s a business, and like any business, understanding your finances is crucial. Two key financial concepts every farmer should know are break-even and cash flow. They’re practical tools that can help keep your farm profitable and sustainable. 

Direct Costs vs. Overhead Expenses 

The two main types of expenses you’ll encounter are direct costs and overhead expenses. 

  • Direct Costs: These are the expenses directly tied to producing your crops. Think of things like fertilizer, chemicals, seeds and water. These costs fluctuate based on how much you produce. 
  • Overhead Expenses: These are the costs of keeping your farm running, no matter what you produce. This includes payroll, insurance, equipment repairs and utility bills. These expenses are not directly tied to the production of an individual crop. 

A lot of traditional farm software focuses only on direct costs when calculating break-even points. But to get the full picture, you need to include overhead expenses too. Let’s say you make $100,000 from your crop. If your direct costs are $60,000, it might look like you have $40,000 left over. But if your overhead expenses are $30,000, your actual profit is only $10,000. Understanding this difference is key to knowing your real financial situation. 

What is Cash Flow? 

Cash flow is a record of all the money coming in and going out of your farm. It includes everything from crop sales and government subsidies to the cost of seeds and fuel. Keeping track of your cash flow helps you see where your money is going and ensures you have enough to cover your expenses during the busy months of farming. 

What is Break-even? 

Your break-even point is the point where your revenue from a crop equals your total costs (both direct and overhead). Any money you make above this point is profit. Knowing your break-even helps you set realistic sales targets and pricing strategies. 

Understanding Cash Flow & Break-even: 

  • Make Smarter Decisions: When you know your cash flow and break-even points, you can make better financial decisions in real-time. For example, you’ll know if you can afford to buy new equipment or if you need to cut back on certain expenses. 
  • Yearly Comparisons: Tracking your cash flow over several years helps you see patterns and trends. You can identify good years and bad years, and plan accordingly. 
  • Better Planning: With a clear understanding of your finances, you can create accurate budgets and forecasts. This helps you manage your working capital and ensures you have enough money during peak seasons. 
  • Increased Profitability: Understanding these financial concepts can lead to higher revenue, better relationships with lenders and more sound financial decisions. 

Forecasting Break-even & Cash Flows 

  • Sticking to a Plan: When you forecast your break-even and cash flow, you create a financial plan for the year. This helps you understand the minimum price you need to market your crops at to cover your costs and make a profit. It’s important for setting your marketing and sales strategies. 
  • Projecting Working Capital Needs: Accurate cash flow projections help you anticipate your financial needs during busy times. Whether it’s buying seeds for the next planting season or covering unexpected repairs, knowing your cash flow needs helps you avoid running out of money. 
  • Analyzing Actuals vs. Forecast: By comparing your actual financial results to your forecasts, you can see where you overspent or underspent. This helps you identify problem areas and make necessary adjustments. 
  • Long-Term Planning: Farming is a long-term game. Understanding your cash flow and break-even points over multiple years is essential. For example, a crop cycle might span several years—from purchasing inputs in the first year to selling the harvest in the third year. Traditional accounting software may not handle this complexity well, but specialized farm management tools, such as AgriBuilder, can provide the insights you need. 

These tools help you make informed decisions, plan for the future and ensure your farm remains profitable. If you’re looking to get a better handle on your farm’s finances, consider using tools like Agribuilder, which integrates Figured—a farm management software that helps you create detailed cash flow forecasts and break-even analyses. Contact an Adams Brown agriculture advisor to discuss further. 

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